‘Days of a stronger Mexican peso (USD/MXN) are over’: analyst

The era of the super peso is over as the currency continues its downtrend. The USD/MXN exchange rate rose for the fourth consecutive day even as the US dollar index tumbled below $101. It jumped to a high of 19.33, its highest point since August 7. 

The pair has soared by over 18.9% from its lowest point in April, making the Mexican peso one of the worst-performing emerging market currencies. In contrast, the South African rand has jumped by over 7.7% in this period while the Chinese yuan has jumped by over 2.5% from its highest point in July.

End of the super peso

The Mexican peso has been one of the strongest emerging market currencies in the past few years, helped by the resurgent of the American economy and US tensions with China.

Mexico has become the most attractive country to Chinese companies that are seeking to have a presence in the United States as tensions rise.

For example, BYD, the giant Chinese electric vehicle (EV) company, has said that it would set up a plant in Mexico. Other Chinese EV companies seeking an entry to the US have also made similar plans.

The so-called nearshoring led to a strong Mexican peso as its demand rose. Now, however, the currency has crashed as concerns about the American economy continue. 

Recent economic data from the US have shown that the economy was slowing. For example, the labor market has softened while demand for Chinese goods is still rising despite the trade tensions. 

Additionally, while nearshoring continued, it has not led to an investment boom and analysts expect the economy to grow by just 1.8% this year. This trend explains why the Mexican peso has retreated in the past few months.

Also, traders are watching the Mexican political situation, where Claudia Sheinbaum will become the country’s president in October. Andres Manuel Lopez Obrador, popularly known as AMLO, has been highly supportive of the strong peso during his administration,

A key concern among investors is that he is considering supporting anti-market reforms such as the judicial reform that could weaken the country’s democratic system and make the country less welcoming to investors.

Meanwhile, the USD/MXN pair has also risen after the recent actions by the Mexican Central Bank. In its recent decision, the central bank decided to cut interest rates by 0.25% to stimulate an economy that was easing. 

The Mexican peso has also been caught up in the unwinding of the Japanese yen carry trade. For a long time, borrowing the cheaper yen and investing in Mexican bonds has been a good trade. In a note, a Jefferies analyst said:

“The days of a stronger Mexican peso are behind us. Hard to play in it at the moment unless you get some tactical opportunities from time to time.”

The key USD/MXN news on Thursday will be the release of the latest Mexico GDP data and half-month CPI. Economists expect the report to show that the economy expanded by 2.2% in Q2 after growing by 1.8% in the previous quarter. The Mexican central bank will also publish minutes of the last meeting.

The focus turns to the Federal Reserve

The USD/MXN pair has also reacted to the recent actions by the Federal Reserve. Minutes released on Wednesday showed that some Fed officials supported cutting interest rates in the last meeting. 

Most Fed officials said that there was a need to cut interest rates in the September meeting if the US publishes weak economic data. Recent numbers have not been strong, with manufacturing and industrial output falling and the jobless rate rising to 4.3%.

Looking ahead, the US will release the latest existing home sales data on Thursday. Economists expect the data to show that the number of home sales rose from 3.89 million in June to 3.94 million in August.

The US will also release the initial jobless claims data while S&P Global will publish the flash manufacturing and services PMI report. 

Most importantly, the Federal Reserve chair will make a closely watched statement at the Jackson Hole Symposium on Friday.

USD/MXN technical analysis

USDMXN chart by TradingView

The USD to MXN exchange rate formed a double-bottom pattern around 16.62 between July last year and April this year. 

It has jumped above he double top’s neckline at 18.50. Additionally, the pair has moved above the 23.6% Fibonacci Retracement level. Most importantly, the pair has risen above the 200-week Exponential Moving Average (EMA).

Therefore, the USD/MXN pair will likely continue rising in the coming weeks as buyers target the key resistance point at 20.2260, its highest point this month. This price is also along the 38.2% Fibonacci Retracement point. The stop-loss of this trade will be at 18.50.